Tuesday, 28 May 2013

How not to run a business: examples of poor SOE performance

By the late 1970s-early 1980s the sceptical minority was becoming larger, the mood was turning against government ownership [of firms] among both politicians and economists.

One of the motivating forces for politicians and economists rethinking their position on state-owned enterprises was a history of under performance by these firms worldwide. Some of the more extreme cases of poor SOE performance that have been publicised include:

McDonald (1991) outlines the case of the Hindustan Fertiliser Corporation in Haldia, West Bengal, India. By 1991 the firm had been operating for twelve years and employed twelve hundred workers. Yet up to that time the enterprise had not produced a single kilogram of fertiliser for sale!

The Economist (Economist 1994) details similar experiences in Italy: "[o]ne example was a rolling mill at Bagnoli near Naples built by Italy's state-owned steel company ILVA. Designed to create jobs in a depressed area where the Christian Democrats were strong, the plant, which took nearly a decade to complete, was never used. In Sardinia, another area of high unemployment, politicians made ENI, a state chemicals and energy conglomerate, refit a coal mine, only to leave the miners idle but on the payroll".

In France, the near-bankruptcy of then state-owned bank Credit Lyonnais is another example. In 1997 the French finance minister Dominique Strauss-Kahn admitted that the bank had probably lost around Ffr100 billion (around US$17 billion). The bank had to be bailed out three times in the 1990s. The total cost to the French taxpayer of the whole debacle has been estimated at between US$20 and US$30 billion. See the Economist (1997) for more on the affair.

With regard to the experience of the steel industry in the United Kingdom, Aylen (1988: 2) writes that in "1980/1 the [British Steel] Corporation made a total loss of pounds 1 billion on a turnover of just under pounds 3 billion, earning a place for a while in the Guinness Book of Records. [ ... ] By 1980 British Steel was fundamentally uncompetitive, with cost per tonne almost a third above those of West German producers, and by rights should not have survived". About coal, Vickers and Yarrow (1988: 331) could write, "[i]n recent years, mostly as a consequence of the combination of overinvestment in new capacity and the relatively slow rate of closure of inefficient collieries, the NCB [National Coal Board]'s continued viability has depended upon large injections of Government finance. In 1983-1984, for example, operating losses were covered by subsidies, known as deficit grants, amounting to pounds 875 million.". During a House of Commons debate on nationalisation, denationalisation and renationalisation in 1991 the then Financial Secretary to the Treasury, Francis Maude, said of the British experience with nationalised industries: "I do not wish to dwell on the record of nationalised industries in Britain. It is a sad and depressing saga in our nation's life. We all remember the British Steel Corporation, with its losses of £1 million every day of the year. We all remember British Telecom being in the Guinness Book of Records for the largest loss ever. We all remember the sloppy standards, the waiting lists for telephones, the ever-rising prices, the dingy tale of failure, the contempt for the customer, the craven management and the political interference". (Maude 1991).

The World Bank (World Bank 1995: 33-35) notes that in "Turkey, Turkiye Taskorumu Kurmu, a state-owned coal mining company, lost the equivalent of about $6.4 billion between 1986 and 1990. Losses in 1992 worked out to about $12,000 per worker, six times the average national income. Yet health and safety condition in the mine were so poor that a miners' life expectancy was forty-six years, eleven years below the national average. [ ... ] In the Philippines, the performance of the National Power Corporation steadily deteriorated from 1985 until the early 1990s. In 1990 the capital region alone lost an estimated $2.4 billion in economic output due to power outages. By 1992-93, electricity was shut off about seven hours a day in many parts of the country. In Bangladesh, in 1992 the state sugar milling monopoly had twice as many office workers as it needed, or about 8,000 extra employees. [ ... ] Meanwhile, sugar cost twice as much on the open market in Bangladesh as it did internationally. In Tanzania, the state-owned Morogoro shoe factory, built in the 1970s with a World Bank loan, never manufactured more than about 4 percent of its supposed annual capacity".

Kikeri, Nellis and Shirley (1992: 2) state that "[o]f particular concern to governments is the burden that loss-making SOEs place on hard-pressed public budgets. SOE losses as a percentage of gross domestic product (GDP) reached 9 percent in Argentina and Poland in 1989; through the 1980s about half of Tanzania's 350 SOEs persistently ran losses that has to be covered from public funds; in Ghana from 1985 to 1989 the annual outflow from government to fourteen core SOEs averaged 2 percent of GDP; and in China about 30 percent of SOEs were loss-making in 1991. The losses have important consequences: Mexico's minister of finance has noted that a fraction of the $10 billion in losses incurred by the state-owned steel complex would have been enough to bring potable water, sewerage, hospitals, and educational facilities to an entire region of the country (Aspe 1991)".